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Unexpected expenses pop up, and for many small business owners forced to quickly come up with the necessary funds, merchant cash advances and cash flow loans are often an enticing or necessary option. They’re typically much quicker to obtain than traditional loans, don’t require excellent credit scores, and can sometimes offer more flexible in repayment terms.

All that sounds appealing, but looks (and fast cash) can be deceiving. Cash flow loans and merchant cash advances are accompanied by high interest (15 – 80% APR), daily payments that can lead to detrimental effects on your bottom line. Some business owners may even find these types of lending options will lead them down a rabbit hole of debt, forced to take out more and more money just to cover the daily loss of capital.

Get to Know Your Business Lending Options

If you haven’t already signed on the dotted line of daily payments, you definitely want to consider one of these four alternatives first. However, if you’re already feeling the brunt of a daily payment financing option on your bottom line, these alternatives can prove to be viable forms of refinancing that can help you gain ground in your war on debt.

Small Business Credit Card/Line of Credit: If you don’t feel a loan is the right option for you, or if you don’t need access to a very large sum of money (think $25,000 or less), a small business credit card or a line of credit may the perfect option. Access to cash can be fairly quick, and while they are dependent on credit scores, the requirements aren’t always as strict as those attached to loans.

The rate on these will be a bit higher than a loan (13% – 25%), but you are only required to pay interest on what you’ve used, not what you were approved for. Furthermore, as a revolving line of credit, you’ll have long-term access to funds.

Online Loan: The internet age has brought about a whole new set of loans, and for many, these loans by alternative lenders can be a very appealing option if SBA or bank loans aren’t in the cards.

Though interest rates tend to be a little higher (7% – 30%) comparatively, credit requirements are more lax, ranging about 600 personal credit score and up. You can have access to cash in as little as 7 days. Additionally, these loans come with a much smaller repayment window, and so it’s important to consider the impact that will have on the affordability of your monthly payment.

Traditional Bank Loan: The first place you may consider when it comes to a loan or refinancing is a bank, and rightfully so. Small business bank loans typically come with the lowest interest rates available (as low as 5%) and fairly long repayment terms (up to 20 years).

Unfortunately, if you’re in a hurry or if you don’t have a fairly high credit score, this may not be the right answer. It can take anywhere from 2 to 4 months after paperwork and processing, and with fairly stringent credit requirements, about 60% or more of applicants are denied.

SBA Loans: The pros and cons of an SBA loan are very similar to a traditional bank loan. Interest rates are very low (6% – 13%) and repayment time can be up to 25 years. Similarly, the application process can be arduous and turnaround can be anywhere from 1 to 6 months.

The good news is that even though a minimum FICO SBSS score is required, with solid personal and business credit scores , you have a good chance at obtaining funds through this business friendly lending program.

Check out SmartBiz and Celtic Bank, which are two SBA loan options with a relatively efficient application process.

Regardless of which alternative you choose, always make sure you’ll be able to hold up your end of the deal. As long as you make your payments in full and on time, each of these lending options can improve your business credit. However, if the payments are unmanageable or you simply don’t pay on time, your business credit will suffer, and your chances of qualifying for the lowest cost financing options in the future will diminish.

Still thinking about Merchant Cash Advances & Cash Flow Loans?

If you’re still thinking about taking out a cash flow loan or utilizing a merchant cash advance, be sure to fully understand the repayment terms and how they will affect your business. These lending options can be very risky and some may find the daily payment structure to be too hard on their bottom line.

There’s little question that you’ll be paying quite a bit when it comes to the Annual Percentage Rate (APR) for this type of lending, but there are times when it may just be the right choice for you.

When is it the right choice? Generally speaking, if having quick access to extra cash can mean taking advantage of a huge growth opportunity for your business (i.e., taking advantage of extremely cheap inventory on short notice, hiring a contractor to complete a well-paying job), even after the hefty interest payment, it may be the best thing for you at the time.

Each circumstance is different and the key to making the best decision for your current situation is (and always will be) to evaluate all your options and consider the long and short term impact that each will have on your business.

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About Author

Jennifer is a alum of the University of Denver. While in the graduate program there, she enjoyed spending time identifying ways in which non-profits and small businesses could develop into strong and profitable organizations that while promoting strong community growth. She also enjoys finding unique ways for freelancers and start-up businesses to reach and expand their goals.

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